The global internet technology services industry is going through a revolution as storage and computing in “the cloud” goes mainstream.

While that’s dampening the outlook for IT companies, which are attempting to shield margins, profitable growth could still be in the cards for some companies, write Citi Analyst Surendra Goyal and his team, Ashwin Shirvaikar, Amit B. Harchandani, Rishi V. Iyer and Ryan E. Potter. They note that worldwide IT services spending has been growing at a ~3% compound annual growth rate over the last eight years and the Indian IT services industry has grown its export revenues by an 11.6% CAGR over the last three years. They write:

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“Indian IT services revenue growth is directionally correlated with global macro and tech spends. But vendors continue to gain share in the broader outsourcing market, with offshoring becoming the norm for several global/Fortune 1000 companies. However, we note that with the three challenges of (1) growing scale, (2) increasing competition and (3) disruption in the industry, it might be difficult to sustain this frenetic pace of growth and share gains …

Some of the legacy service lines like maintenance of applications are increasingly getting commoditized given multiple factors: (1) the advent of newer technologies, (2) increased competition, (3) budget constraints for clients, (4) and clients’ needs to invest in newer services. These services still account for 40-50% of revenues for the sector and, to remain competitive, companies are increasingly investing in a new wave of delivery innovation led by automation and artificial intelligence.”

Citi analysts also note that with the Europe/Middle East/Africa region accounting for about a third of worldwide tech spending, companies need to reach into areas beyond Europe — and the United States. Dare we say it? Goyal et al note that China is a part of the growth opportunity, as is global infrastructure management.

“China is a $136 billion market — As per research firm Forrester, tech spending in China is forecast to reach $136 billion in 2015, representing +9% year over year. China’s share of total Asia Pacific tech spending is expected to be ~27% and growing. While purchases of computer equipment form the largest segment of this tech spend, tech consulting and outsourcing show the strongest growth, off a small base …

A combination of positioning, investments and valuations results in our preference for HCL Technologies (532281.India) in Indian IT and Cognizant Technology Solutions (CTSH) in U.S. IT service, our top picks. Within the pure-play BPOs, our top pick is WNS (WNS). Among European IT services, our analyst prefers Capgemini (CGEMY), which is in Citi’s EU focus list. We prefer Tata Consultancy Services (532540.India) over Infosys (INFY) and maintain a Sell on Tech Mahindra (532755.India).

China, Korea, Taiwan and Mexico show the strongest positive 2015 earnings revisions, according to Citi emerging market Strategist Mandy Ym Chan, along with Markus Rosgen and Yue Hin Pong. But in Europe, the Middle East and Africa [EMEA], earnings-per-share growth forecasts for 2015 are down 14%, and investor sentiment is negative as price-to-earnings ratios are slightly above the historical average. South Africa, Turkey and Greece are the biggest drag, and Citi asks if EMEA can sustain its 5.1% outperformance year to date. Here’s a bit more:

“STOCK PERFORMANCE: Emerging markets are outperforming developed markets year to date by 3.2%. Asia has outperformed at 11.3% followed by EMEA at 5.1% and then Latin America at -6.9%. China has outperformed by 26.1% year to date. Other outperforming countries: Korea, Philippines, Taiwan, Chile, Russia and South Africa. All sectors within EM are up still up year to date. Cyclical sectors continue to outperform defensives year to date by 3.6%.

PROFIT TRENDS: Global [earnings] revisions stayed negative but the pace of downgrades improved, recording the best monthly revisions so far this year. The pace of downgrades improved for emerging markets but less than that of developed markets.

For emerging markets, Asia and Latin America have improved revisions but worsened for EMEA. Improved revisions this month came from China, Philippines, Brazil, Mexico, and Russia. The weakened revisions in EMEA came from. South Africa, Turkey and Greece.

Within emerging market sectors, eight out of ten sectors saw improved revisions this month. Utilities had the most upward revisions while Industrials and IT has the most downward revisions.”

See Citi’s table (also above) for a list of 20 emerging market companies with earnings growth estimates moving in a positive direction. On the list are three Latin American names that trade in the U.S.: Mexico-based cement producer Cemex (CX), Colombian energy company Ecopetrol (EC) and Brazilian steel company Gerdau (GGB). Also on the list: China’s Ctrip.com International (CTRP) and South Korean telecommunications company KT Corp (KT).

Wipro’s ability to return to industry growth rates is the key to long-term health, writes Janney. The Indian information technology services company, one of India’s largest, reported IT services growth of 1.8% quarter over quarter, and 8.6% year over year, but IT services results were better at some competitors:

Joseph D. Foresi and Jeffrey S. Rossetti at Janney write that top line results were slightly below expectations, earnings were in line with their expectations, but:

“We maintain our NEUTRAL on Wipro … We continue to look for an inflection point in growth rates given the recent deal wins and advantageous positioning in the infrastructure vertical with potential growth currently being offset by pockets of weakness … Other positives: Infrastructure (27% of revenue) +22.6% y/y, Americas (51% of revenue) +11.3% y/y, and Healthcare (11% of revenue) +20.1% y/y performed well on an annual basis offsetting weakness in ADM (16% of revenue) -11.5% y/y (attributed to Telecom) and consulting (2% of revenue) -10.7%. There was weakness across the top customer’s attributed to the Energy & Resources industry. … We lowered our FY15 revenue estimate to $7.25 billion from $7.31 billion on the miss in the quarter and lower than expected guidance. Our fair value is $11 (lowered from $12) based on 18x our FY15 EPS estimate.”

But some analysts say the next big move should be down. Susquehanna Financial Group’s James Friedman, for instance, cut Infosys to negative from neutral today. He cited the company’s valuation–which has increased to 18x earnings–without the earnings to justify it. He also says that the company might have a tough time meeting its earnings and revenue growth targets for its 2014 fiscal year. And Infosys is trying to change its business mix, a move that requires new technology and employees–and could eat further into already-declining margins. Friedman also worries that the stock has less than $3 of upside, and potentially more than $10 dollars of downside.

The upshot:”Shares looked price to perfection,” Friedman wrote in his report.

JPMorgan’s Viju George and Amit Sharma, meanwhile, tell buyers to “beware” of Indian IT companies generally. In a report dated Mar. 12, they try to dispel some of the reasons for bullishness on the sector.

While some investors, for instance, say that this is the beginning of a “multi-year upturn for India IT,” George and Sharma explain that its “too early to call this.” The last time a multi-year bull rally started was in 2010, which occurred as companies stopped cutting spending. That hasn’t been the case this time around, where spending has been slow, but still growing. Betting on more demand means betting on a better global economy–something the analysts aren’t prepared to do.

Other investors are betting that the stock will overshoot as it rises, because that’s what tech stocks tend to do. Sharma and George warn that all that needs to happen is for the companies to meet forecasts and “this frenzied extrapolation cycle breaks, sending…valuations into a tailspin.”

As they say, buyer beware.

Infosys has dropped 0.1% to $52.69 today, while Wipro (WIT) has gained 0.25% to $9.95.

Can the gains keep coming? JPMorgan’s Viju George and Amit Sharma think they might. In a note dated Feb. 22, they kept the stock rated an overweight, writing:

Infosys is likely turning the corner – several positives are now visible. We particularly liked Infosys’ settling down for a more realistic margin band. Revival in bread-and-butter business last quarter (3QFY13), flexibility in deals improving win rates, embracing a more realistic margin profile, attempt to re-engage with employees, and willingness to re-invest margin gains from a bloated bench are central to our positive view on Infosys. These aspects should play out in the backdrop of improving demand health for the sector.

Infosys has gained 26% this year heading into today’s trading, while the WisdomTree India Earnings exchange-traded fund (EPI) has lost 1.8%.

Volume decreased 1% (below peers), while pricing increased 3.8% (above peers). Wipro guided to 1%-3% sequential growth in the March quarter similar to guidance for the December quarter….Management commented that client budgets are flat and expects FY14 to provide better growth than FY13 as its pipeline remains strong.

Other Indian IT companies are holding up, despite Wipro’s big drop. Infosys (INFY), for instance, has dropped just 0.3%.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. The Barrons.com Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools.